PSPP: Commercial Awareness for all

Probably the juiciest piece of commercial awareness to get to grips with in a long time is the German Federal Constitutional Court’s (FCC) judgment that Weiss, a CJEU case, is ultra vires. Now I realise this doesn’t sound like a Tiger-King-level lockdown thrill, but bear with me, because whether public or private law is your tipple of choice, whether your penchant constitutional competence or international economics, this one’s got it all! This is definitely one to watch with big consequences in almost all areas of law, so bear with this momentary venture into public law.

Background: Transnational constitutional competence

All families experience their tensions (something which has particularly been brought home among the joys and challenges of being locked down with loved ones!). All families experience the particular tension of navigating authority – how do independent children, or young adults, submit to the authority of a parent, yet wholly retain their own sovereignty? Whilst an imperfect illustration, this is one way we can think about the family gathering which is the European Union. A group of wholly autonomous States have agreed to be united under a common rule, determined by a supranational authority. EU Member States have effectively appointed an independent matriarch into whose family they will be adopted and under whose rule they will (in certain areas of competence) submit themselves.

This relationship needs structure. When will decisions be made by the EU, and when by Member States? What weight should be given to the decisions of the European institutions across the different Member States? How should the EU institutions come to their decisions?

Before we look to the current ruling of the FCC, we need to consider the answers to the above and get some background on the jostle for authority which is going on in the EU family home. So, let’s recap some of the classic episodes which have emerged across the many series of the EU family drama so far…

Hopefully this offers a clear but enticing trailer of the EU relationship and tensions on competence so far which convinces you to go and investigate the whole series in its entirety. First, let’s turn our attention to the latest episode, the FCC’S PSPP ruling.

PSPP case

Once upon a time was 2008. The global financial crisis threatened the very fabric of the Eurozone as shockwaves coursed through economies. Bail-outs and transnational monetary policies were, and have since been, implemented to steady the Euro, helping the recovery of those states most effected and trying to navigate the complexities of a single currency.

The recent jurisprudence revolves around the Public Sector Purchase Programme (PSPP), one of several limbs of the European Central Bank’s (ECB) broader Asset Purchase Programme, aiming to manipulate inflation to a more appropriate level and stabilising and strengthening the Euro. The PSPP would enable national central banks to purchase national government bonds in order to inject capital into the economies of the Member States. In short, the PSPP is one manifestation of quantitative easing (QE).

[I’m conscious that the above terminology may be new to some readers. If that’s the case for you, please don’t lose heart or close this window – I’ve included some key definitions, explanations and further resources below, do check them out and come back to reading the rest of this article – it will make better sense with this background.]

The original PSPP complaint was brought back in 2015 by a group of around 1,750 people. Since, ECB and CJEU have reviewed the PSPP – in Weiss we have the CJEU’s judgment that the programme is within the competence of the ECB. In many ways, Weiss was no surprise. The seminal Gauweiler judgment marked the FCC’s first ever preliminary reference to the CJEU and was also based on certain features of the ECB’s government bond-buying programme. This preliminary reference was purely legal, focussing on the conferral of competence to the ECB and ensuring that this remained in the best interests of Member States. The FCC wanted assurance from the CJEU that the ECB’s bond-buying programme was merely a supporting mechanism for EU economic policies and not central to the stability of the European Monetary Union. That assurance came: the CJEU gave several conditions which demonstrated why the ECB’s bond purchase programme did not violate any Union laws on the distribution of competence to the ECB. The FCC accepted this. Why do I bother with this background? Simply to say that the CJEU quite possible believed that Weiss was a run-of-the-mill decision. The world mostly expected Weiss to be reasoned similarly to Gauweiler.

The FCC apparently did not feel the same. Theodore Konstadinides has offered a concise summary of what has happened:

“The [FCC] found that the PSPP carried considerable impact on the fiscal framework in the Member States and the banking sector in general. As such, the Court concluded that both the German Government and Parliament violated the complainants’ rights under the Constitution by failing to monitor the [ECB]’s mandate, in particular as regards the adoption and implementation of the PSPP.

Most importantly perhaps, the Constitutional Court held that it was not bound by the preliminary ruling of the CJEU (Article 267 TFEU) on the same issue (in Weiss […]).” (emphasis added)

As Kyriazis has outlined clearly, the FCC’s logic: discrediting the ECB’s approval of the PSPP scheme by first stripping away the legal support accredited by the CJEU in Weiss. The FFC’s attack rests on a few core premises:

• Competence – the ECB has overstepped the mark and is venturing into economic, rather than monetary policy, which is outside of its sphere of competence.

• Constitutionality - the German authorities have violated their constitutional duties in failing to monitor the ECB’s mandate.

• Proportionality and conferral – the CJEU failed to properly balance the objectives of the PSPP against its political, economic and fiscal effects, which the FCC suggests includes “the risk of creating real estate and stock market bubbles as well as the economic and social impact on virtually all citizens, who are at least indirectly affected inter alia as shareholders, tenants, real estate owners, savers or insurance policy holders” (para 173). The result, as perceived by the FCC, of the CJEU’s reportedly incompetent analysis is that the principles of proportionality and conferral have been rendered “meaningless”

Consequences

So what? What does all of this actually mean?

A probable quick-fix answer to the FCC

It’s questionable just how sturdy the rationale of the FCC really is in its judgment. Miguel Poiares Maduro has offered a helpful reflection on the paradox in the FCC’s ruling, suggesting that its rationale is illogical and concluding that legally the solution may be relatively straightforward. It is irrational – and shaky ground – to submit that the ECB should consider inter alia the economic and fiscal implications of their decisions, whilst holding that their competence is strictly monetary. Unfortunately, we cannot have it both ways – if it is not within the ECB’s mandate to consider the fiscal and economic benefits of their monetary policies, they cannot be charged to consider the economic and fiscal ramifications of those policies.

Martin Wolf has similarly hinted that the immediate solution may not be particularly troublesome – a proportionality test from the Bundesbank (who – unlike the ECB – do fall under the jurisdiction of the FCC) would be a sufficient, but “albeit also a bad [precedent].”

Unhinged legal integration

Whilst the immediate case may be patched up and addressed with relative ease, the episode frames yet another example of resistance to transnational openness and a retreat to nationalism to protect the interests of certain stakeholders. Francesca Strumia reminds us that historically, it is the CJEU who has been charged with the protection of certain stakeholders (think about pensioners, students, workers, migrants… who all have protected rights by virtue of their European citizenship). The FCC judgment “clumsily hints to the interests of some of those sets of stakeholders” (Strumia) – Member State constitutional courts will look to prevent policies which they believe to be disproportionate and ultimately adverse to the interests of their national citizens. Clearly real estate bubbles are not high on German citizens’ Christmas list, and the FCC are right that policies which may entail such risks need to be made in an appropriate way so as to protect EU citizens. The FCC ruling however, goes against a long tradition of legal integration, it is national-centric, hostile to transnational openness

Strumia explores this within the context of legal integration. She interestingly underlines the historic importance of managed recognition (i.e. the courts of the Member States agreeing to recognise and follow the judgments of the CJEU whilst the latter acts within the boundaries of competence conferred to it by those Member States – Strumia and Kalypso Nicolaïdis put it far more poetically! Follow the links for a fuller exploration of the notion). Strumia reminds us of Weiler’s classic vision of what has become the EU, highlighting legal integration as a way in which to often compensate for some of the shortfalls in political integration. Is that legal integration fraying?

Whilst the above is almost inseparably connected to the ligaments of politics, Strumia is right that the CJEU could have made a more transnationally-open analysis in its approach. She suggests how this would look within the cadre of the PSPP judgment: contextualising the mandate of the ECB within the framework of a single currency, and dealing with the underlying rationale for a single currency, with all the economic, political and fiscal facets of that policy. Until we recalibrate the debate on the axis of transnational union, we may continue to see a general magnetism towards nationalism.

Legally – can we expect a quick fix, steady division, or long-term reform? At present it is unclear.

The role of the ECB and economic recovery within the Eurozone

The FCC explicitly say that their judgment refers to the PSPP and not to the EU’s most recent programme to support the eurozone in the wake of the COVID-19 pandemic (PEPP). Making this distinction is practicably impossible. If the PSPP is questioned, then PEPP and other QE programmes must similarly be analysed. Theodore Konstadinides is blunt in his conclusion that to consider the PEPP unaffected is “wishful thinking”. He states, the PSPP was designed with a “long list of limits and conditions attached to it, which are missing from the PEPP. By way of example, under the rules of the latter, even bonds that do not have investment-grade rating are eligible.” If the PSPP has been deemed unpalatable, the higher-risk PEPP is surely unlikely to meet the proportionality threshold on a similar examination.

QE is an important and useful tool in the pocket of States and supranational entities which can lessen the effects of financial distress. The consequences of the ECB no longer being permitted to utilise this tool would be significant, particularly in the current crisis. If one QE-centric judgment concludes that the ECB have exceeded their mandate, it is hard to see that other monetary policies will not also be caught up in the crossfire.

Amid all of this drama, we’ve borne witness to the Macron-Merkel relationship flourishing, seemingly unfettered by the obvious challenges of COVID-19. Their long-distance collaboration has come at an interesting time and whilst it seems like a tangent away from the world of academia, competences and public law, we should see events in the political sphere as a separate room in the EU family drama – yes, it’s a different scene, but what happens in one room is not forgotten once we move into another, effects carry across and ripple throughout the house and the EU family.

Macron's plan is to develop an EU Recovery Fund which will issue grants (i.e. not loans) to Member States and is imbued with “fiscal federalism” – it’s dripping with the kind of transnational optimism and support which the FCC have riled against. It’s a novel approach and to get Merkel on board is a big step forwards. By no means is the success of his plan guaranteed – he still has to convince the “Frugal Four” (Austria, Denmark, Netherlands and Sweden) who have – perhaps unsurprisingly – not embraced the plan with open arms.

Does Macron's optimism and economic plan suggest a change to EU economic and monetary policy and how will the ECB mandate and transitional sentiment be impacted?

Further action – State unity and the domino effect in other Member States

Thomas Man, writing in 1953, noted that Germany should abandon all nationalistic ambitions of a German Europe, instead focussing on uniting its neighbours around a European Germany. It seems that the branches of the German State remain in conflict over this position. The FCC have, in the words of Philip Stevens “raised a nationalistic flag” whilst Angela Merkel has sided with Macron in the proposal of a Recovery Fund. Many academics have highlighted the possibility that other Member States could begin to bring decisions against the CJEU on similar grounds to the FCC, namely that the CJEU has not sufficiently attended to the principle of proportionality in its judgment. The effect would be further fraying of the fabric of legal integration and potential fragmentation within the Union.

Conclusions

No-one argues that the latest episode in the EU family drama hasn’t caused a stir, but the jury is out on just how much of a stir it will amount to. In one corner we have economist Martin Wolf proclaiming an “insoluble crisis” as the FCC demonstrate that Germany too can take back control, he suggests that future historians may even mark this as the beginning of European disintegration. Exciting stuff - far too exciting for many legal academics who have generally erred on the side of caution, Francesca Strumia, Dimitrios Kyriazis and Miguel Poiares Maduro are among those who caution that this episode could remain a bump in an otherwise resilient relationship.

There are two central questions to take from all of this. Whether you’re a seasoned expert in the realms of EU law, or have read thus far in relative incomprehension – the below are the critical take-homes and watch-this-space pillars of this development:

1. How will legal integration be affected by the FCC’s rebellion against the CJEU?

Will we see a transnationally-open view take hold?

Will we see further cases brought by Member State constitutional courts?

Will we see changes to the process of managed recognition?

Will we see fragmentation in the legal integration of the Union?

2. How will economic and monetary policy be implemented throughout the Eurozone, especially in a crisis?

Will the ECB have an extended mandate to consider the benefits and deficits of economic policy in the monetary policies they propose and implement?

Will political leaders begin to have a more prominent role in monetary policy and economic recovery, led by Macron’s emergency fund plan, or will the many obstacles of political debate prove too insurmountable to achieve reform?

This is almost certainly a case which will fill textbooks, blog posts and journal articles in future - for now, we must wait to see just how significant the effects of the judgment prove to be.

Sources:

See hyperlinks in body of article for references to academic articles.

• Martin Wolf, Financial Times, German court decides to take back control with ECB ruling, May 12, 2020

• Philip Stevens, Financial Times, The EU’s fate rests on Germany’s identity crisis, May 21, 2020

• Martin Sandbu, Financial Times, German court has set a bomb under the EU legal order, May 5, 2020

• Jim Brunsden and Sam Fleming, Financial Times, EU divisions laid bare by ‘frugal four’ recovery proposal, May 24, 2020

• Martin Arnold and Tommy Stubbington, Financial Times, "German court calls on ECB to justify bond-buying programme" May 5, 2020

• Steven Erlanger, New York Times, “Merkel, Breaking German ‘Taboo,’ Backs Shared E.U. Debt to Tackle Virus” May 18, 2020

Key terms and helpful background:

• Monetary policy - involves the use of interest rates and changes to the supply of money to achieve relevant economic objectives – see here for further details.

• Fiscal policy – tax policies used to achieve relevant economic objectives – see here for further details.

For a comparison if monetary and fiscal policies see here.

• Capital – money.

• Bonds – a form of debt issued as an IOU – bondholders will buy the bond for a premium. They are buying the promise to repay the premium at a fixed time in the future, plus interest (coupon – so named because bonds used to literally have a coupon which would be torn off to redeem the interest). Bonds can be corporate (i.e. a company promises to repay bond holders at some point in the future, or government bonds (i.e. a government takes the premium from bondholders and agrees to repay them in the future). Bonds can be traded on the secondary market. The risk of bonds can be assessed using a credit-rating. his follows the logic of how likely the bondholder is to get their money back, for example, most government-backed bonds are considered less risky than most corporate bonds.

• Quantitative easing - a policy which entails an injection of capital into an economy.